These Top Marijuana Stocks Have the Best Profit Margin – The Fool Motley

Transferring marijuana sales from the dark to legal marijuana dispensaries is a multi-billion dollar opportunity. Cannabis companies are spending a lot of money to gain market share sooner. The spending rush means that the marijuana industry is losing money at the present time, but some companies offer a higher gross margin than others, making them first choice interesting.

How big is the opportunity of marijuana?

The market opportunity associated with marijuana is done wisely. On a global scale, marijuana expenditures total about $ 150 billion a year, of which $ 50 billion is spent in the United States.

However, most of this spending is still done in camera. Uruguay and Canada are the only two countries to have legalized the national use of marijuana for recreational purposes, and these countries only account for a share of the total market in the world. The marijuana market in Uruguay is tiny and the Canadian market is only about $ 5 billion a year, or about 3% of total global spending. In the fourth quarter, only 20% of marijuana sales in Canada were made legally.

In the United States, individual states are adopting pot-friendly laws, but marijuana remains illegal at the federal level. At present, 33 states have authorized the use of marijuana for medical purposes and 10 states have approved markets for recreational use. In any case, legal marijuana sales in the United States amounted to only $ 8.4 billion in 2018, according to Matt Karnes of GreenWave Advisors, which represents only about 17% of total US expenditures for this market. plant.

Who are the largest publicly traded marijuana growers?

The American marijuana industry is fragmented because of the federal status of marijuana. US producers face barriers to accessing banking services and expensive tax policies. In addition, they can not appear on major marketplaces, including on the New York Stock Exchange, because marijuana is still a banned drug of Schedule 1. Instead, cannabis companies are United States is listed on the over-the-counter market, a Wild West-type exchange exposed to increased risk of fraud.

Thanks to national pot laws and the decisions of the country's largest producers to avoid the US marijuana market, they have been able to secure adequate financing and, in many cases, listings on the NYSE and NASDAQ. As a result, they have become the largest publicly traded marijuana growers.

Cannabis growers in Canada can be divided into two levels based on sales and marijuana production capacity. Cover growth (NYSE: CGC) and Aurora Cannabis (NYSE: ACB) are at the forefront with annualized sales and production forecasts of over C $ 200 million exceeding 500,000 pounds per year. Second-tier cannabis companies include Aphria (NYSE: APHA), CannTrust Holdings (NYSE: CTST), Cronos Group (NASDAQ: CRON), HEXO Corp. (NYSEMKT: HEXO), Organigram (NASDAQOTH: OGRMF), and Tilray (NASDAQ: TLRY). They offer peak production potential of up to 300,000 pounds per year and each could soon reach nine digits in annualized sales.

Who has the best gross margin?

The gross margin gives an overview of the companies that could be the most profitable one day. It shows the amount of revenue remaining after deducting the cost of goods sold or expenses directly related to the manufacture of products, such as material costs and labor. As such, gross margin helps investors determine which company produces the lowest cost marijuana or sells the most profitable products.

To allow Canadian marijuana growers to compare their gross margins from one apple to another, investors need to focus on gross margin excluding changes in the fair value of inventories, a measure required by organizations. international accounting regulations that can be volatile.

Excluding these changes in fair value, OrganiGram's gross margin of 60% in its last quarter ranks first, while Aphria's gross margin is worst.

Recently, Aphria acquired two international drug distributors representing $ 56 million of its revenues of $ 74 million last quarter. Because these distributors have a gross margin lower than 15% and that they are not still earning money selling marijuana, the gross margin is not as good for measuring production costs of Aphria marijuana as for OrganiGram.

OrganiGram owes much of the benefit of its margin to a 3-tier cropping system that optimizes the production of square-foot pots in its indoor growing rooms. To take full advantage of this approach, the Moncton site will be expanded by 92 growing rooms this year, which is expected to triple production capacity to 113,000 pounds per year.

In addition to OrganiGram, Aurora Cannabis and HEXO deserve congratulations for their gross margins above 50%. Aurora Cannabis's gross margin is aided by increased production from existing greenhouses with automation, while the product line is an important factor in the success of HEXO. Dried flowers have lower retail prices than those derived from marijuana, such as oils, so that producers who derive a larger percentage of their sales of oils see their gross margin decrease further. more. Oils accounted for 23% of HEXO sales in its last quarter, up from 19% in the prior quarter.

Data source: regulatory filings. MRQ = last quarter. * Gross margin excluding adjustments to the fair value of inventories.

What to look next

The gross margin could improve for these companies as expansion plans are put online and can reach full production. This is especially true at Aurora Cannabis, where marijuana production jumped to 150,000 pounds a year in the first quarter of 2019 as a result of a major expansion of its Aurora Sky greenhouse. The gross margin of businesses that rely heavily on wholesale supplies of marijuana, including Tilray, may face challenges until supply finally meets the demand of the Canadian leisure market, potentially making them less competitive. attractive in the short term.

Overall, I think this ranking will change over the next year, but OrganiGram's performance suggests that it might be best placed to turn marijuana revenues into revenue. 39; here.